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Active managment – Going beyond the index

The debate over the merits of active and passive investing has been going on for some time. Ivy believes investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

Market Perspectives/ 05.08.20

Looking beyond stock market volatility

Market volatility can be unsettling, but history shows that prices have returned to less volatile patterns over time. That can be good news for long-term investors.

Market trends show long-term investors generally have been rewarded over time. However, periods of extreme volatility can challenge even the most seasoned investors. Ivy believes having a perspective of the markets and the factors affecting them can be helpful in assessing current opportunities.

Navigating the Psychological Toll of COVID-19

Discover practice tips to helping support your clients during the pandemic.

Genlink

A succession plan for the next generation

You’ve spent your career teaching clients the importance of retirement planning and how to protect their assets. But have you considered what will happen to your business when it comes time for you to pass it to the next generation of advisors?

Genlink

Generational happiness

From loyalty to impact and autonomy to experiences discover how each generation defines happiness.

Ivy Investments

We stand for a legacy of expertise, focused on delivering strong, long-term results. Our name reflects our progressive product offerings and growing global presence as we continue to adapt to the needs of investors.

Ivy Sector Insights – Consumer Discretionary & Consumer Staples

Commentary as of April 2, 2020

The COVID-19 pandemic has impacted retail in many unique ways. There are several online, low-touch merchants that are benefitting from the current environment, though non-essential, brick-in-mortar counterparts are facing large headwinds as imposed lockdowns are adversely impacting consumption in the traditional sense. It’s safe to say, the current market environment is unprecedented.

How are you grappling with the current retail environment?
This is a truly unprecedented situation. On one end, we’re seeing long lines form at places like Costco and Walmart. On the other end, department stores are literally shutting down, and furloughing employees. No one was prepared for a zero-revenue scenario, which is now the reality that many are facing. While there are many losers to talk about, as a long-only investor, I’ll try to focus on the perceived winners and frame it as near-term beneficiaries and long-term beneficiaries.

Near-term beneficiaries
I think there are two direct beneficiaries in the near-term, the essential brick’n mortar retailers like Walmart, Costco, Kroger and E-commerce players like Amazon.

While the increased online shopping is obvious due to the lockdowns, I think it’s worth digging a bit deeper on the tailwind the essential retailers are seeing. While there is clearly some panic buying (or stockpiling) going on right now that will likely be short-lived, there is also a legitimate increase in demand for grocery spending as well, for several reasons: 1) schools are closed so parents need to feed their children at home, 2) restaurants are closed or have limited options, and 3) more individuals are staying home due to fears of contracting the virus. While the first two factors will likely go away once the lockdowns are lifted, the fear factor will likely linger a bit longer, so I would expect to see elevated grocery demand for at least for a few more quarters.

However, we’re not necessarily recommending adding more to these essential retail stocks right now as we believe the tailwind is transitory. Also, stocks like Walmart, Costco and Kroger have all held up very well in the current market sell-off, as this is exactly the time when these kinds of defensive stocks typically perform well. If we see a market recovery, I think alpha will be found elsewhere.

Long-term beneficiaries
To frame the long-term beneficiaries, I think it is important to focus on the behavioral changes that will likely persist among consumers, and think through the structural changes the retail landscape will go through.

In terms of behavioral change, these are exactly the times that consumers are more willing to change their behaviors, and I believe some of those behaviors will stick with them even after the pandemic is behind us. From that perspective, I believe online grocery is worth paying attention to, as we are seeing huge surge in demand for Amazon Fresh, Walmart grocery pickup, Instacart, etc. There is always friction in trying out a new type of service. In this case, you have to download the app, set up an account, select the items that you want to order, and get it delivered or drive by for a pick-up. Assuming the customer is happy with her/his experience, there is much less friction in re-ordering their regular pantry items with a few clicks, and I believe many will continue to do so going forward. As a result, I believe we’ll see a step-change in online grocery penetration this year, and further see adoption accelerate in the coming years.

While traditional grocers will also participate in this arena, I believe the biggest winners will be the larger players that also carry non-grocery goods, such as Amazon and Walmart. Grocery is a high frequency, but low margin category. So it’s not that attractive from a profitability stand point, but very attractive from a frequency and customer engagement stand point. By upselling higher margin goods along with the grocery basket, I believe Amazon and Walmart are best positioned to capitalize on the online grocery opportunity compared to traditional grocers.

In terms of structural changes in retail, the U.S. was already chronically over-stored with too many malls and too many specialty stores. As more people shop online, department stores and mall-based specialty retailers were already struggling heading into this crisis, and now they are literally in survival mode. This pandemic may very well be the nail in the coffin for many of them. I would expect more bankruptcies and store closures in the coming months. For instance, retailers like Neiman Marcus, Lord & Taylor are either in talks to file for bankruptcy or considering to liquidate their business. As we see such supply rationalization, I believe off-price retailers like TJ Maxx, Ross, and Burlington are poised to gain share by capitalizing on the unsold inventories and selling them at a discount.

It sounds like the strong are getting stronger, and the weak are getting weaker. Do you see opportunities from an investment standpoint, or is most of this already reflected in market prices?

I don't see a huge dislocation in the more defensive names like Costco and Walmart, but I do believe there are some dislocations among the off-price retailers relative to the opportunity that lies ahead. They also had to shut down their stores recently, which resulted in a panic sell-off of their stocks, but I believe they are well positioned to capitalize on the glut of apparel inventory, and gain more market share, which will likely be reflected in their valuation in the coming quarters.

Some of the larger retailers like Amazon have announced hiring a large number of associates. Do you think this level of hiring will help offset the growing number of job cuts?

It likely won’t be enough to offset the job losses we are about to see. I believe the passage of the CARES Act helps. Small businesses will take advantage of the forgivable loans which are meant to be used as a bridge. I don’t think it will solve everything, but it will help soften the blow. Assuming majority of these small businesses do survive, many folks will likely go back to their prior jobs. However, inevitably, there will be some business failures, and portion of the job losses will be permanent. Also, keep in mind that while retailers such as Amazon (100,000) and Walmart (150,000) are hiring many workers, most of those are temporary positions so it won’t be able to replace the full-time jobs that will be lost.

Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 2, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

The CARES Act is the Coronavirus Aid, Relief, and Economic Security Act, a law meant to address the economic fallout of the 2020 coronavirus pandemic in the United States.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Alpha is a measure of a security's actual returns and expected performance, given its level of risk.

Risk factors: Investment return and principal will fluctuate, and it is possible to lose money by investing. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market.

Ivy Sector Insights – Energy

Commentary as of April 1, 2020

Let’s start by outlining the current state of the oil markets. For those not paying attention, the world is drowning in oil. We are facing a situation where West Texas Intermediate crude is at $20 per barrel, down 65% year to date. Wholesale gasoline prices are at about 50 cents per gallon, and we may soon see prices at the pump below $1 per gallon in certain parts of the U.S.

How did we get here? Both oil supply and demand are in really difficult trends.

On the supply side: The world is drowning in oil right now. OPEC and Russia are in nothing short of a feud. The roots of this are understood by looking at the different interests of each entity, which are widely divergent: The ruble and tax regime in Russia and the fiscal breakeven points for the two are quite different. During the last production cuts announced by Saudi Arabia, the Russians were reluctant participants. When Saudi Arabia went back to Russia asking for more cuts, Russia just got up and walked away from the table. So, it feels like you have children in charge of this process who are more concerned with saving face and power than a functioning market. The cash cost to currently produce oil is in the mid-single digits in Saudi Arabia, so OPEC can produce it very quickly and at a very low cost.

On the demand side: The globe is experiencing COVID-19, which has destroyed the demand side. It’s hard to overstate the impact of this situation on global energy markets. Estimates are for demand to decline 25-30 million barrels per day, which equates to about a 25-30% demand drop. Jet travel, motor travel … it is all down.

Unconventional drilling, also known as shale drilling, has been the foundational pillar of the U.S. oil resurgence and it is now completely uneconomic. This has been a cataclysmic shift in the dynamics regarding how oil is produced.

Keep in mind that this is a cyclical industry. The current situation is the culmination of a very deflationary cycle, which started in the oil markets about five years ago. These can be long cycles, but COVID-19 has really accelerated this cycle to the downside. The real question is, “how long do we stay here because oil prices cannot stay this low forever?”

With every commodity downcycle, we sow the seeds for the potential of an inflationary cycle on the other side. In the U.S., we need a massive cleansing. We have too many producers and capital has been too plentiful. This morning (April 1), we saw the first high-profile bankruptcy – Whiting Petroleum Corp. We are going to experience many more bankruptcies in the oil patch in the U.S. At these prices, drilling in North America has to completely stop for the time being. There is also a good amount of production that isn’t profitable on a cash basis, which means we need to not only stop drilling, but also turn off some existing wells. This may sound scary, but we think it is necessary to set the stage for the next cycle. It will take time and capital to bring that productive capacity back online.

The key takeaway: We are in the later innings of a long and painful deflationary cycle in the oil space. But this is not a monolithic space – there are options that have less sensitivity to oil prices like refiners and midstream companies. These cycles are as old as oil production itself. Some companies with fully integrated business models have been around for more than 100 years. Some oil and gas producers have come and gone during this same time frame. To survive these cycles, a company needs to have other assets that can help it weather the worst of the storm. So, we are focused on the integrated companies that we think have sustainable business models even at the lowest possible oil prices.

We have spent a lot of time thinking about how we should be positioned for the other side of this situation. We still think it is too early to be buying exposure to the commodity price so we might characterize this as the beginning of the end of the down cycle. We believe when the dust settles, there will be a lot of opportunity across the spectrum, and not just in oil and gas but also in renewable energy, electric vehicles, etc. We are working to position ourselves for a good up cycle but we think we will be in a bit of a minefield until we reach the bottom of the down cycle.

Ivy had been looking at high-quality business models versus pure commodity driven resource extractors, and that was well before the most recent downturn. Given recent events, is this still Ivy’s view?

Absolutely, we are not just stuck with companies within the energy space. We seek companies within other sectors, like materials. We have made recent recommendations or are looking at opportunities related to companies outside of energy like firms that specialize in coatings. We think these are good, non-commodity businesses with very sustainable business models.

Do you think there will be a storage issue with all of the oil being produced?

Yes, Canadian oil in some cases is selling for $5 per barrel. There is storage available, but it is limited. We could carry on at this rate for months, but not years. The really concerning part is that once these facilities are at capacity, the discussion turns into oil being a waste product and producers will have to pay others to take the surplus.

The Trump Administration is calling for rollback of efficiency. How are alternative energy companies faring in the current environment?

We are still in early days for this space. We are going to find out if alternative energy and electric vehicles are viewed as a bull market luxury or if they are more secular trends that will persist longer term. In our opinion, these are durable trends. For example, as battery costs decline, there will be greater adoption of electric vehicles. If the current administration decides to pump the breaks on some of these issues, we think it would be temporary. This could unveil an opportunity to take advantage of weakness and look at parts of the energy sector that have strong secular tailwinds. Renewable energy is not monolithic and there are very different business models from which to choose.

Regarding a V-shaped recovery versus U-shaped recovery, are there any types of businesses that tend to perform better in those two different environments?

We think the answer to that question is clear, but successful investment decisions depend on the risk assigned to each scenario. Our opinion is that this recession will be longer and more durable than a lot of folks anticipate. If a V-shaped recovery occurs, we think the companies with the most financial leverage and most exposed to commodity prices should do relatively well. But those are the same companies that could go bankrupt if the recovery is L or U shaped. So success here will depend on risk tolerance and portfolio construction.

Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 1, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Several technical terms and acronyms were used throughout this commentary. West Texas Intermediate crude is a grade of crude oil used as a benchmark in oil pricing. OPEC is the Organization of the Petroleum Exporting Countries, an intergovernmental organization with the stated mission of coordinating and unifying the petroleum prices of its member countries and ensuring the stabilization of oil markets. In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. An L-shaped recession or depression occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the energy related industry, the Fund may be more susceptible to a single economic, regulatory, or technological occurrence than a fund that does not concentrate its investments in this industry. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the fund to other risk considerations such as potentially severe price fluctuations over short periods of time. The Fund may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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Ivy Sector Insights – Health Care

Commentary as of March 31, 2020

What are your latest views on the health impact of the coronavirus?

It might be helpful to frame the impact of COVID-19 relative to the seasonal flu. With influenza people have immunity from either catching it previously or getting vaccinated. With COVID-19, it is a novel virus: we don’t have any immunity, which makes everyone initially vulnerable. In addition, the case fatality rate is higher than the seasonal flu. We don't really know how high it is yet due to limited testing. We will need to study the population after the first wave of the virus has made its way through the population and administer tests to determine who was exposed and who was not. However, we do know based on confirmed cases, that the case fatality rate is higher for COVID-19 than the seasonal flu.

A grave concern is the sheer volume of confirmed patients in specific geographies possibly overwhelming their local health care systems. Hospitals are not adequately prepared. They don’t have enough tests or equipment such as masks, gowns, ventilators, beds, and unfortunately, there is also shortage of healthcare providers in some geographies. Before we can ease social distancing, we must have adequate supplies and equipment.

The social distancing efforts underway to flatten the disease curve in the U.S. are somewhat encouraging. In New York, cases are still increasing, but at a slower rate. And many other areas of the country are also still increasing, but in one of the first hit areas, Washington state, the daily new cases are no longer increasing, and it appears social distancing is having an impact. The goal is to see new cases diminish to the point there are nearly no new cases. We believe it could take the U.S. about six to eight weeks to get there, and our success depends on our compliance with social distancing and testing capacity. Now we are mostly just testing moderately and severely symptomatic patients. I think we need to also test mildly symptomatic patients to get the daily new case numbers down to very low levels.

We have been analyzing data from a medical device company that tracks the temperature of its 1 million customers through its smart digital thermometer. Based on their data over the past week, the percent of people with a fever due to an upper respiratory infection has plummeted. Innovations like this are going to help us keep the virus in check once we ease the social distancing. This data will be at the leading edge alerting our providers of an outbreak.

What's your take on the testing landscape?

In the first wave of a pandemic we use testing technology that is very accurate in detecting early infection based on the RNA of the virus. The sample is collected from the nose and mouth. Just a couple weeks ago, the U.S. only had capacity to test up to 5,000 people per day primarily performed by the Public Health Service, but the demand for testing was much greater than the supply. As more and more private companies got approval for their test, some of which are run on high throughput instruments, we have been able to grow our capacity to about 120,000 tests per day. But still we are not testing all the patients with symptoms, just the people who are more severe. As capacity continues to expand, we will at some point soon be able to test all patients with symptoms. And I think at that point the rapid point of care testing will become more important, these tests can give a result in 5-15 minutes, and mild patients who are getting tested can know their status before they leave the doctor’s office. Rapid tests will also be useful in screening asymptomatic people which becomes critical once social distancing is eased. So lots of testing capacity is needed to eventually contain this virus. At that point, the point of containment, we will be ahead of the virus. But staying ahead of the virus will require a comprehensive plan encompassing testing, technology and dedicated health care professionals.

Once we get ahead of the virus we can focus on the next phase of testing, which is antibody testing. Each individual might want this testing to know whether he/she is immune. If you had a mild infection and were never tested and recovered, you will not be positive any longer for the RNA of the virus. In that situation to figure out if you are immune you do antibody testing which turns positive days to weeks after the infection. Basically, this test measures the antibodies you developed to the virus. But more than just each individual knowing his or her antibody status, the public health systems wants to understand what the immunity of the population is. The greater the immunity of the population the lower the risk going forward. Finally, this antibody testing will also provide the data to calculate the actual mortality rate from this virus.

While the global response to the COVID-19 outbreak is paramount, what are your longer-term views for the health care sector?

Within the health care sector, one of the hardest hit areas has been medical device and equipment companies that are exposed to more discretionary procedures. Many elective surgeries have been cancelled in response to the outbreak, as hospitals shifted care to coronavirus patients. As a result, some medical device companies have seen their stock prices fall 30-50%. It will take time for some of these surgeries, such as ophthalmology, orthopedic or dental procedures to return to surgery suite, but we believe they will. The only issue preventing these companies from realizing their earnings potential is coronavirus and once it is behind us their earnings power should be restored and their stocks should recover.

Longer term, as we consider how the world will be different after this pandemic, we see several opportunities. The use of technology, particularly connected technology, will gain even greater appreciation as a means of managing the health of the population. Also, we believe this pandemic will drive investments in life sciences research and pandemic preparedness, which will be a tailwind for the life science tools and services industry.

FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: Investing involves risk and the potential to lose principal. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. Healthcare companies are subject to extensive government regulation and can be significantly affected by government reimbursement for medical expenses, rising costs of medical products and services, and pricing pressure, in addition to other factors.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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Market Sector Update

Last quarter, we wondered whether the market had gotten ahead of itself. While we knew that good times were
destined to end, we couldn’t identify the catalyst. It’s now clear that the COVID-19 pandemic will end the record U.S.
economic expansion. Draconian public health measures focused on social distancing are bringing the economy to a
standstill. The U.S. is not alone, and we are entering a synchronized, global downturn. The decline looks big,
uncertain and skewed to the downside, prompting an epic policy response.

Policymakers recognize that this is a multi-pronged challenge – a correction in valuations, a liquidity squeeze, a
collapse in energy prices, and an upturn in defaults stemming from cyclically high corporate leverage and COVIDspecific
shocks. The Federal Reserve (Fed) pulled out all the stops, cutting the federal funds target by 50 basis points
(bps) in early March and then, in a 100 bps move, all the way to 0% on March 15. The Fed then resurrected many of the
programs from the great financial crisis, including a new, unlimited quantitative easing program focused on treasuries
and mortgage-backed securities, short-term funding support (repurchase agreements, commercial paper and assetbacked
securities), easier terms for banks and dealers (discount window terms), and dollar liquidity for foreign central
banks (dollar swap liens).

Congress is doing its part, too. After passing legislation to fund COVID-19 vaccine research and an additional $104
billion in increased state aid, it passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, an
unprecedented $2 trillion bill of support, targeting hard hit segments of the economy. The bill includes $1.2 trillion in
direct support for consumers and small businesses, and $500 billion in first loss capital and direct lending to affected
industries (including airlines), health care funding, and increased unemployment benefits, including broadened access.

Economists are struggling to get a handle on the length and depth of a recession during a pandemic, as well as the
impact of a forceful policy response. Projections for gross domestic product (GDP) are all over the board with second
quarter 2020 estimates ranging from -9% annualized growth to -40%, and full-year estimates of -1% to -6%. The
problem is that no one really knows how the practices for managing the virus will unfold over the coming months.

Portfolio Strategy

The Fund delivered a negative return and underperformed its benchmark for the quarter.

Weak security selection results accounted for almost 80% of the underperformance with the Fund’s positions in the
securitized sectors accounting for over half of the results. Investors’ concerns about homeowners’ and renters’ ability
to continue to make timely payments of their monthly obligations in particular caused substantial weakness in the
Fund’s positions in agency credit, non-agency credit and other housing-related securities. In addition several
leveraged mortgage-related funds were forced to liquidate substantial holdings of non-agency securities to meet
margin calls towards the end of the quarter, putting further pressure on the market.

Poor results from positions in the industrial sector accounted for most of the rest of the poor security selection results
for the quarter. The Fund’s positions in energy in particular underperformed the sector, accounting for about 60% of
the negative results in industrials. Weakness in autos and the Fund’s secured airline positions also added to the
negative results. The Fund’s overweight allocation to the corporate and structured credit markets also had a negative
impact on its performance relative to its benchmark. The Fund’s overweight allocation to financials, utilities and the
overall structured market contributed to about 25% of the Fund’s overall underperformance relative to its index. The
Fund benefited slightly from the relatively shorter duration nature of its industrial positions. The Fund’s interest rate
exposure and yield curve positioning had a slightly negative impact on relative performance during the quarter.

Exposure to corporate bonds fell during the quarter as the portfolio management team sold positions in energy,
autos and rails. Some of the sales were made proactively as the COVID crisis started to unfold, and some were made
to reduce exposures to credits that have exited (or likely to exit) the investment grade space and are unlikely to return
any time soon, such as Occidental Petroleum, Ford and General Motors. We added several positions towards the end
of the quarter at attractive new issue spreads as the new issue market for corporate bonds opened up in a big way.
We also added to positions in several utilities, healthcare, food and auto parts retailing in names we feel are likely to
navigate this difficult environment better than others.

The Fund’s largest overweight positions in terms or market weight in the corporate bond sector are utilities,
transportation, banking, consumer cyclicals and energy. The Fund’s energy exposure remains predominantly in
midstream pipeline companies and refiners. The largest underweights from a market weight perspective in the
corporate space are in consumer non-cyclicals, technology, real estate investment trusts (REITs), basic industry and
capital goods. We feel the Fund’s overweight position in corporate credit is prudent given the Fed’s various liquidity
programs, but the Fund’s more off-index positions may lag the recovery in the more liquid sectors of the corporate
market.

Structured exposure fell as a percentage of the Fund’s net asset value during the first quarter. The team reduced
exposure to agency mortgage-backed securities (MBS) on concerns that the rapid drop in interest rates would increase
prepayment speeds significantly. Proceeds were invested in Treasuries. The portfolio remains overweight assetbacked
securities (ABS), commercial mortgage-backed securities (CMBS) and non-agency MBS and underweight
agency MBS. The team remains comfortable with its overweight positions in the consumer-facing sectors of ABS and
non-agency MBS. We believe these structures have sufficient cushion to withstand substantial stress on the underlying
borrowers. However, the Fund’s positions in agency and non-agency credit may also lag the recovery in the more liquid
segments of the residential-facing securitized market.

The team added to the Fund’s overall duration during the quarter

Outlook

At this time, investors don’t have enough information to accurately estimate the length and severity of the pandemic
response. The longer economic growth is constrained by social distancing, the deeper and more long lasting the
impact. Households and small businesses entered this crisis with limited reserves, increasing the risk of breaching a
tipping point that accelerates the downturn. The effectiveness of the policy response is a key question and will be an
important factor this downturn.

Our view is that the Fed has the necessary tools to improve market liquidity, and that liquidity concerns should
dissipate for high quality borrowers. Monetary policy is likely to have a limited effect. Lower rates may eventually work
their way into borrowers’ pockets, but they’re unlikely to stimulate demand during a lock down. On the other hand, no
one really knows how effective the CARES Act will be though $2 trillion represents an impressive 9.5% of GDP. The
legislation appears to do a good job of targeting shocked segments, such as small businesses and households.
However, no one really knows how soon the money will reach its targets.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Aggregate Bond Index is market capitalization weighted index, representing most U.S. traded investment grade bonds. It is not possible to invest directly in an index.

Duration is a measure of a security's price sensitivity to changes in interest rates. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a
shorter average duration.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment
grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be
offered at all broker/ dealers.

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Market Sector Update

International small-cap equities experienced an extremly negative return during the first quarter, following a strong
positive return during the fourth quarter. Equity markets globally were extremely weak over the first quarter, driven by
increasing concerns about the COVID-19 pandemic which has grown at a very rapid rate. The epicenter of the
pandemic moved from China and Asia early in the first quarter, to Europe toward the middle of the quarter, and then to
North America. Successive governments have responded by shutting down vast parts of their economies in an effort
to slow the rapid spread of the virus. Equity markets have taken fright at the scale of the forecasted economic
weakness, which has resulted in massive job losses globally and the closure of many businesses. As a result, a lot of
companies have announced massive cancellations and/or cuts to dividends as well as withdrawing their forecasts for
2020 earnings.

All sectors were negative for the quarter with the worst performing sectors being energy, consumer discretionary,
utilities and financials.

Portfolio Strategy

The Fund produced negative performance but outperformed its benchmark for the period. At the country level, stock
selection in France, Ireland and the U.K. were the top contributors to relative performance, while stock selection in
Belgium, Germany and Japan were the top detractors to relative performance.

Top relative individual contributors to performance for the period included Arteria Networks, a Japan-based
telecommunications company; Kobe Bussan, a Japan-based discount grocery store chain and SG Holdings, a Japanbased
delivery and logistics company.

Top relative individual detractors to performance for the period included Ardent Leisure Group, an Australian-based
hotel and leisure company; National Express Group, a U.K.-based public transportation company; and Sixt Fe, a
Germany-based rental car company.

Portfolio changes within the Asia-Pacific region over the quarter included the addition of Australian gold miner
Evolution Mining, which has very competitive production costs and a disciplined management team that we feel excels
at acquiring, developing and disposing of gold mining assets to generate shareholder value. While we added this
position to the portfolio before COVID-19 emerged as a threat to global growth, we continue to like gold given our view
that interest rates should remain low and fiscal deficits should remain high for the foreseeable future. Within Japan,
the portfolio added a position in Sansan, the largest cloud-based customer relationship management (CRM) in the
country. Capcom, a Japanese video game developer, was also added as we think the company will benefit from its
strong catalog of hit game titles which may draw new, long-term fans during periods of COVID-19 related social
distancing. The Fund’s position in BOC Aviation, an aircraft lessor, was sold in mid-January as we felt valuation no
longer justified owning the position.

Portfolio changes in Europe over the quarter included the initiation of a position in Cranswick, a U.K.-based vertically
integrated pork and poultry processor. We believe the company has a strong reputation for both quality and innovation,
making it a supplier of choice for the large U.K. retailers who primarily use the company to produce in their private label
offering. The firm has been a strong beneficiary of the current lock-down arrangements in the U.K., as it boosts at home
consumption. Cranswick is also the U.K.’s primary exporter of pork, making it a prime beneficiary of increased Chinese
demand, driven by a sharp reduction in domestic supply due to African Swine Flu. The group also have a nascent but
high potential opportunity in U.K. poultry, which could be a significant contributor to earnings in time if it can emulate
the success it has achieved in the pork segment.

We also added Patrizia AG, a German-based real estate company, whose market valuation we believe fails to reflect
the geographical and segmental diversity of the group’s income stream or the fact its business model has gradually
transitioned from that of an asset heavy to a more capital light operation where over 50% of earnings are generated
from recurring asset management fees.

Outlook

Our current outlook is set against the backdrop of a likely significant decline in economic growth and corporate
profits over the next few months in particular due largely to the COVID-19 pandemic and numerous countries largely
closing down their economies. As a result, we expect fiscal and monetary policy to remain highly accommodative in all
the geographies in which we invest. We believe developed economies are relatively better positioned to provide
aggressive fiscal and monetary stimulus to support their economies as unemployment rises, while this is not the case
for many emerging economies.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon.Past performance is not a guarantee of future results.

Effective Feb. 21, 2019, Ivy IG International Small Cap Fund was renamed Ivy International Small Cap Fund. Additionally, the name of the sub-adviser changed from I.G. International Management Limited to Mackenzie
Investments Europe Limited. Mackenzie Investments Europe Limited delegates to its subsidiary, Mackenzie Investments Asia Limited, for additional portfolio management responsibilities. References to Mackenzie
Investments Europe Limited include both entities.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined
with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions
affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in small-cap stocks may carry more risk than investing in stocks
of larger more well-established companies. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may
decrease. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Associated Funds:

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Market Sector Update

The quarter saw a sharp decrease in optimism due to the COVID-19 pandemic and resulted in one of the fastest
market corrections on record along with projections of a sharp U.S. and global recession. Global purchasing managers
(factory) indices and consumer confidence are expected to crash as well as those surveys are released.

The manufacturing part of the world’s economy had already dramatically slowed but this had been more than offset
by a solid services economy. With the COVID-19 pandemic certain, service industries are now hard hit and
manufacturing will further fall such as orders for cars, planes and other durable goods, resulting in falling capital
expenditure budgets for new equipment. Additionally, several segments within the service and industrial economies of
the U.S. and Europe will experience sharp declines in activity due to various stay-in-place and social distancing
measures designed to flatten the curve of COVID-19 cases.

The Fund’s benchmark index was down strongly (-26%) during the quarter and U.S. equity markets collapsed from
all-time highs. While all sectors were down, the best performing sectors were the defensive sectors – health care,
consumer staples, utilities and communication services. While the poorest performing were energy, consumer
discretionary, financials and materials.

Portfolio Strategy

The Fund posted negative performance but outperformed its benchmark. Both stock selection and sector allocation
aided performance relative to the benchmark, while country allocation hurt relative performance during the period.
Currency effects benefitted performance for the period.

From a sector allocation perspective, the Fund’s overweight position in health care and underweight allocations in
consumer discretionary and financials aided relative performance. On the other hand, an overweight allocation in
energy and underweight in communication services hurt relative performance. Stock selection was most positive in
energy, information technology, industrials, utilities, consumer discretionary and health care while selections in
financials and materials and were a drag on relative performance. Geographically, stock selection was positive in
Europe and in the U.S., while negative in China.

We are currently overweight health care, information technology, industrials, and utilities, while underweight
financials, energy, consumer discretionary and communication services. During the quarter, we shifted our overweight
in energy to underweight as we believe valuations of a few names relative to fundamentals were no longer favorable
due to the notable deterioration in the supply-demand outlook for crude oil. We continued to add to health care as we
believe several stocks were mispriced/undervalued due to an overreaction of negative sentiment surrounding health
care/drug price reform and would not see dramatic earnings downgrades and structural damage from the sharp
economy recession. While U.S drug pricing is facing downward pressure, reform will depend on the political outcome
post the November Presidential election. We also went from overweight to benchmark weight in consumer staples as
we believe absolute and relative valuations will not match longer term fundamentals.

Our investment approach remains steadfastly focused on investing in what we believe are quality businesses with
favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and geographies. The core of our approach is based on stock selection as the key driver of
portfolio inclusion and construction. As such, we do not significantly adjust portfolio positioning based on our shortterm
economic (six months) outlook or other factors that could impact a company’s earnings outlook over the short run.
However, a core part of our focus is on finding quality businesses that we believe are mispriced due to these shorterterm
market dislocations or other factors that the market has underappreciated.

Outlook

2020 will be a year we remember as a time of quarantines, lockdowns, social distancing, working from home, digital
learning and so many other new experiences. Undoubtedly this unusual moment will drive new areas of opportunity
for well positioned businesses. One could see COVID-19 as a key moment impacting the trajectory of business travel,
commercial real estate and many legacy models of behavior that will need to adopt and re-calibrate to a new world.

From a broader geopolitical point of view, the willingness and ability to respond to the COVID-19 induced economic
infarction has been quite uneven. On one end of the spectrum, the U.S., China and the U.K. (to name a few) have taken
aggressive action in responds to the pandemic. We anticipate these areas will experience less severe intermediateterm
pressure on growth and output. Other countries or economic blocs, such as the EU and many emerging-market
nations, lack the mechanisms, cohesion and/or sheer monetary and fiscal brute force needed to manage current
downside risks. We anticipate the recovery in some of these areas to be more sluggish in scale and scope.

Our broad view is for a sharp decline in near-term economic activity and corporate earnings, followed by a steep
(though partial) snapback. From that point, we expect a moderate pace of recovery as is typical following most
downturns. As is also typical, the pacing of growth will be quite heterogeneous across companies, sectors and regions
as adjustments occur to new realities, opportunities and uncertainties. Such an environment may offer substantial
attractive investment opportunities for well-positioned businesses that can be acquired at valuations that may fail to
reflect either new opportunities or excessively discount short-term uncertainties.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined
with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions
affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the
net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may
not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.These and other risks are
more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Market Sector Update

The first two months of quarter were strong as the U.S.–China trade deal was finally signed in January. Business
confidence was improving and optimistic. Job growth was solid; beating expectations and the unemployment rate was
at a historical low. The stock market reached new records with consumer confidence elevated. The outlook for 2020
was for stable global growth.

Unfortunately, the rise of COVID-19, which began in late-November 2019 and spread throughout China, Asia, Europe
and ultimately the U.S. in early-March, has dramatically impacted the overall picture for global growth, capital markets
and financial stability. This macro-environment led to an immediate decline in global gross domestic product (GDP)
output, massive job losses and enormous reductions of wealth.

The fiscal and monetary responses have been massive with the Federal Reserve (Fed) cutting rates to zero, and
providing U.S. dollar liquidity to other central banks, money market funds and corporate credit. It also started unlimited
quantitative easing with large purchases of U.S. Treasuries and mortgage-backed securities. Most central banks have
indicated they will respond as needed to maintain operations and avoid dysfunctional financial markets during this
crisis and it is clear that they will keep policy extremely accommodative as their economies recover. The monetary
response has been just as impressive. The $2 trillion spending bill passed the Senate and House of Representatives
and should help bridge the effects of “social distancing.”

The sharp contraction in economic activity stemming from COVID-19 and the related shutdown is assumed to be
temporary. Uncertainties dominate, but the baseline assessment is the acute stage of the health crisis has largely
ended in China and will begin to ease in advanced countries by late- April to early-June. Recoveries in different nations
will depend mainly on their performances prior to the pandemic and whether factors that supported or detracted from
economic performance will change. The downside risk is that the pandemic extends longer and there is an extended
period of getting back to normal activities, which lowers the overall economic activity and GDP drifts sideways from
depressed second-quarter levels rather than a “V” shaped recovery.

Real estate securities have not outperformed the broader equity market as would typically be expected in such
periods of disruption, given the defensive nature of real estate’s contractual revenue and the sector’s attractive
dividend yield. These defensive characteristics were more than offset by the tightening of financial conditions.

Portfolio Strategy

The Fund underperformed its benchmark and Morningstar peer group for the quarter. Most of the underperformance
was attributable to the Fund’s exposure to credit. The Fund’s exposure to lower quality CCC credits, as well a securities
priced off of LIBOR, had a negative impact on the Fund. CCC credits underperformed due to their significant reliance
on a strong U.S. economy. Securities that are priced off short-term interest rates underperformed as the Fed cut its
policy rates by 125 basis points in order to ease funding pressures. Concerns of a global recession due to the COVID-
19 pandemic have led to a dramatic decrease in confidence, consumption and business investment. These concerns
spilled into the credit markets, which witnessed large spikes in credit spreads to levels not seen since the 2008 global
financial crisis.

Roughly 49% of the Fund was allocated to equity at the end of the quarter. The Fund’s equity positions contributed
to performance relative to its benchmark with stock selection most positive in energy, information technology,
industrials, materials and consumer discretionary.

With concern of a global recession, the U.S. dollar strengthened over the quarter against developed market currencies as the pound and euro gained 6.3% and 1.6%, respectively. The Fund’s U.S. dollar exposure of
approximately 71% contributed to relative performance.

We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low-duration
strategy for the Fund as we feel it allows us a higher degree of certainty involving those companies in which we can
invest. With the dramatic increase in credit spreads, we are taking this dislocation to allocate our portfolio out of higher
quality U.S. Treasuries and credit into higher yielding credit.

We continue to focus on maintaining proper diversification for the Fund. We continue to hold a higher level of liquidity
(patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital
when we believe dislocations in the market arise.

Outlook

The U.S.’s sizable fiscal packages provide much needed income support for sidelined workers and financial support
for businesses facing interrupted product demand and cash flows. However, the packages are not fiscal stimulus that
will generate stronger growth.

China was weak going into the crisis; its domestic demand had slowed sharply. Business fixed investments had
decelerated materially, while growth in gross capital formation had been propped up by government infrastructure
investment. Consumer and business debt levels were very high, which reduced the government’s flexibility to stimulate
more.

Most emerging markets were not well positioned going into the pandemic. In some Latin American countries,
misguided policies and poor leadership have created turmoil that had contributed to capital flight. Debt levels are
relatively high, and in special cases like Turkey, are burdened by large amounts of U.S. dollar-denominated debt levels
that are costly to service as their currencies weaken versus the dollar. The other concern with emerging markets is the
dramatic decline in the price of oil. This impact has dramatically reduced budgets in OPEC, Russia, Nigeria, Brazil,
Mexico and other nations.

The tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We
believe new factors stemming from COVID-19 will fuel the move further away globalization, which will change complex
international supply chains, higher tariffs and potentially increased barriers to immigration.

The majority of listed real estate companies enter this recession with strong balance sheets and ample liquidity.
Moreover, companies have reacted swiftly to the seismic shift in economic conditions and moved to augment and
preserve liquidity. Strong capital foundations position these companies to weather the storm.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The Fund is managed by Ivy Investment Management Company. The total return strategy is sub-advised by Apollo Credit Management, LLC and the global real estate strategy is sub-advised by LaSalle Investment
Management Securities, LLC.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and
exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund's other sleeves, or to the market as a whole, which would result in the
Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) in addition to the overall management of the Fund, including rebalancing
the Fund's target allocations, IICO and Apollo make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO or Apollo will not always
complement each other, which could adversely affect the performance of the Fund. As a result, the Fund's aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally
be larger or smaller than intended. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and
differences in real estate market values. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting
standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise.
Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments)
carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently
on the secondary market. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Lock this content.:

Market Sector Update

The first quarter saw a dramatic sell-off in risk assets due to the COVID-19 pandemic, which caused domestic equities
to decline by nearly 20%.

The evolving COVID-19 pandemic has been met with unprecedented fiscal and monetary stimulus. During the quarter,
the government responded with several stimulus measures including the $2.2 trillion CARES Act, similar to the stimulus
passed during the 2008-2009 crisis. In addition to cutting rates 150bps, the Federal Reserve (Fed) also launched QE4,
which was subsequently termed “unlimited” in size. It will purchase both U.S. Treasuries and agency mortgage-backed
securities. It is going to be purchasing investment-grade corporate bonds with maturities of four years and less in the
primary (new issue) market, while it has a separate program to purchase investment grade corporate bonds with
maturities of five years and less in the secondary market. Additionally, it will also begin buying highly rated commercial
paper. The launch of the investment-grade corporate bond purchase program by the Fed has thus far marked the high
point investment-grade spreads, which rapidly compressed in the days subsequent to the program’s announcement.

U.S. Treasuries rallied sharply in the quarter with the yield on the 10-year U.S. Treasury falling 125 basis points (bps)
from 1.92% to 0.67%. The yield on the 2-year U.S. Treasury fell 132 bps from 1.57% to 0.25% as the Fed cut rates twice,
by 50 bps in early-March then again by 100bps in mid-March, ending the quarter with a target range of 0%-0.25%.

During the quarter, the yield curve steepened slightly as the difference between the 10-year U.S. Treasury and the
2-year U.S. Treasury rose 8 bps to 42 bps.

The spread on the Fund’s benchmark, the Bloomberg Barclays U.S. Corporate Bond Index, widened massively from
93 bps to 272 bps, a level not seen since the 2008-2009 financial crisis and above the prior recession level in
2002. Intra-quarter, the index reached 373 bps before rallying into quarter end. High yield lost 12.68% in the quarter
as the spread on the high yield index rose from 336 bps to 880bps, while loans fared even worse, losing 13.19% in the
quarter.

Despite the substantial increase in volatility in the quarter, investment-grade bond supply increased dramatically in
the days after the Fed announced it would begin purchases. During the period, investment-grade bond issuance
totaled $480 billion, up 49% from the $321 billion issued in the first quarter of 2019. The month of March accounted for
$262 billion of issuance by itself, up 129% year over year. This surpassed the prior monthly issuance record of $178
billion in May 2016. Given the spread widening, issuance was dominated by higher quality issuers. For the quarter, AA,
A and BBB rated issuance increased 193%, 89% and 4% year over year, respectively. The duration of issuance during
the quarter rose with average time to maturity at 13.3 years, above the 11.7 years average for new issuance over the
past four years.

Ratings action this quarter had a severe negative trend with the two-week rolling net ratings change hitting -$673
billion in March, the highest in at least 20 years. The market saw a large uptick in fallen angels, those issuers
downgraded from investment grade into the high-yield market. The first quarter had $149 billion of fallen angels, and
we believe more will come as $243 billion of BBB rated investment-grade bonds have spreads wider than the BB index.
This compares with the approximately $60 billion of fallen angels in the first quarter of 2016 during the energy crisis,
$80 billion in the second quarter of 2009, and less than $20 billion through all of 2019. In high yield, downgrades
exceeded upgrades by 6-times and 5-times for Moody’s and Standard & Poor’s, respectively, levels last seen in the
first quarter of 2016.

Portfolio Strategy

The Fund had a negative return and underperformed its benchmark, mainly driven by the Fund’s more aggressive
positioning relative to the benchmark. Return was primarily driven by a fall in interest rates and coupon income, more
than offset by widening of the benchmark spreads by 179 bps.

The Fund’s duration fell slightly during the quarter and remains under the benchmark’s duration of 7.81 years. Higher
duration means higher price volatility for a given change in spreads as well as interest rates.

The Fund increased its allocation to BB rated credits, at the expense of the Fund’s exposure primarily to BBB rated
credits. The largest changes in sector positioning were increases in the financial and consumer cyclical sectors and
decreases in the consumer non-cyclical and industrial sectors.

Outlook

The markets have been derailed by the COVID-19 pandemic. We believe markets will find difficulty pricing in the
vast uncertainty and the impact on macroeconomic variables and asset classes. A year ago it would have been
impossible to predict the events of 2020 thus far, but what was seemingly predictable was that eventually a negative
economic shock would occur and expose the excesses built in the corporate credit markets, a process now unfolding.

While we have long been cautious on the corporate credit market due to our view that excesses had built up, we
now believe the combination of the valuations and stimulus programs, most principally the program to purchase
investment-grade bonds by the Fed, has created an attractive environment to take risk in the asset class and are
positioning the portfolio accordingly.

For the last 20 years, spreads in the investment-grade market have averaged 146 bps, and now stand at 255 bps.
The yield on the 10-year U.S. Treasury has averaged 335 bps over the same 20 year period and ended the quarter at
67 bps. The ratio of investment-grade spreads to the 10-yr Treasury yield currently sits at 3.81-times versus the average
of around 0.5-times over the last 20-years – this exceeds the prior peak of approximately 2.5-times during the 2008-
2009 recession. Coupled with the $10.5 trillion of negative-yield debt instruments globally, we believe there is a
powerful technical supporting the investment-grade market.

While we believe the high point in spreads has been reached for this cycle, the path will be bumpy given the
unprecedented scenario that occurred in the first quarter. We believe the various investment-grade issuers will see a
wide dispersion in returns as various businesses are impacted in dramatically different ways by the COVID-19
pandemic. We believe this year will have the largest number of fallen angels ever with greater than $500 billion of
investment grade issuers falling in 2020. This amount is roughly 50% of the entire high-yield market, which we believe
will be difficult to absorb. Based on this view, combined with the Fed’s support of the investment-grade market, we
believe superior risk-reward exists in investment grade relative to the high-yield market. We think the dispersion and
fallen angel activity we expect this year favors an active approach to investing in this market.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

The Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market and includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial,
utility and financial issuers. It is not possible to invest directly in an index.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change and you could lose money on your investment. Fixed income securities in which the Fund may invest are subject to credit risk, such that an issuer may not
make payments when due or default or that the risk that an issuer could suffer adverse changes in its financial condition that could lower the credit quality of a security that could affect the Fund’s performance. A
rise in interest rates may cause a decline in the value of the Fund’s securities, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of
interest or principal than higher-rated bonds. Investing in foreign securities involves a number of economic, financial, legal, and political considerations that are not associated with the U.S. markets and that could
affect the Fund’s performance unfavorably, depending upon the prevailing conditions at any given time. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk
and extension risk. The Fund typically holds a limited number of fixed income securities (generally 40 to 70). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater
impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities. Fund performance is primarily dependent on the management company’s skill in evaluating and managing the Fund’s
portfolio. There can be no guarantee that its decisions will produce the desired results. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all
broker/dealers.

The financial products and services described in this website are offered only in the United States, Puerto Rico
and the U.S. Virgin Islands. Nothing in this website should be considered a solicitation to buy or an offer to sell such products
and services in any jurisdiction where the offer or solicitation would be unlawful under the laws of such jurisdiction.

IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS® are managed by Ivy Investment Management Company and are distributed by Ivy Distributors, Inc., InvestEd℠ Portfolios are managed by Ivy Investment Management Company and are distributed by Waddell & Reed, Inc. These financial products are offered by prospectus only. Waddell & Reed Financial, Inc. is the ultimate parent company of Ivy Distributors, Inc. and Waddell & Reed, Inc.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund or portfolio.
This and other important information is contained in the prospectus and summary prospectus, which may be obtained here or from a financial professional.
Read it carefully before investing.

IVY INVESTMENTS℠ refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS®, and the financial services offered by their affiliates.